Exchange rates of various countries are the values of one’s currency when exchanged

to another country’s currency. It is determined by the increase and decrease of supply and

demand in the market. There are three types of exchange rate system that are used by various

governments: floating exchange rate, fixed exchange rate, and pegged float exchange rate. 

A floating exchange rate is impelled by the rise and fall of the supply and demand in the

market. If the supply surpasses the demand then the currency will fall, but if the demand outruns

the supply then the currency will rise. Based on the word “floating”, the exchange rate can differ

or fluctuate pursuant to the foreign exchange market without restraints compared to the fixed

exchange rate system. Some economists claim that using a floating exchange rate system is

the best option among the other exchange rate system because it freely varies according to the

economic situation of one’s country. 

On the other hand, fixed exchange rate has been used by many industrialized nations

since the early 1970s. It is an exchange rate system used by the government that is uniform

with other countries’ currencies or the price of gold. With regards to the fixed exchange rate,

their government decides the worth of their currency as compared to the currencies of other

countries. To safeguard one’s currency value, the country’s central bank is the one who takes

care of the reserves of the foreign currencies and gold so they can sell it in the foreign

exchange market and either make up for the excess demand of the country’s currency or

absorb their excess supply. One example of fixed exchange rate is the gold standard wherein a

unit of the country’s currency is converted to the rate of gold. 

The last exchanged rate system used by many governments is the pegged float

exchange rate. It is the combination of the fixed and floating exchange rate wherein a country
that uses this system allotted a certain value in their currency that is fixed and also allows a

certain value to fluctuate based on the circumstances of their economy. 

A currency call options and currency put options are types of options and an example of

derivatives in which it provides the buyer the right to buy or sell the commodity on a specific

date which is also called as expiration date at a stated price or strike price. The difference

between the US options and Europe options is that US options can be exercised any time

before the expiration date while Europe options can only be exercised during its expiration

date.   

Currency call option contracts gives the right but not the obligation to buy the underlying

asset at the strike price given in the contract. Options’ investors buy calls if they assume that the

price of it will increase while they sell it when they assume that the price of the underlying asset

will decrease. Once the buyer pays the option premium stated in the contract, then the buyer

will consider potential profit if the price of the underlying asset in the market will increase. The

advantage of buying options is that it would not incur loss beyond the purchase price of the

buyer. 

On the contrary, currency put option contracts give the right but not the obligation to sell

the underlying asset at the strike price given in the contract. Investors buy puts if they assume

that the price of it will decrease while they sell it when they assume that the price of the

underlying asset will increase. 

Investors use currency call options and put options to hedge against risks on their

investments. For example, if an investor buys or sells options on the stock, his or her
investments in the options will shell out the losses if there are any, in the underlying asset.

Options are also used for free-standing investments. One of the many uses of call and put

options is hedging or buying puts. It is utilized by investors during earnings season in which they

will buy puts on the stock to provide protection to their portfolio. Also, managers buy puts when

they want to limit the risk exposure of their funds. On top of that, investors benefited from buying

calls or selling puts if they believe that the price of the underlying asset will rise. When

downward movements on the price occurs, investors can still manage to make the most out of

their options by selling calls or buying puts. 

References:

Lumen Learning (n.d.) Exchange Rates. Open Economy Macroeconomics. Retrieved from

https://courses.lumenlearning.com/boundless-economics/chapter/exchange-rates/#:~:text=An

%20exchange%20rate%20regime%20is,exchange%2C%20and%20pegged%20float

%20exchange.

J. Chen (2020). Exchange Rate Definition. Investopedia. Retrieved from

https://www.investopedia.com/terms/e/exchangerate.asp

C. Mitchell (2020). Floating Exchange Rate. Investopedia. Retrieved from

https://www.investopedia.com/terms/f/floatingexchangerate.asp#:~:text=A%20floating

%20exchange%20rate%20is,or%20predominantly%20determines%20the%20rate.

C. Majaski (2020). Fixed Exchange Rate. Investopedia. Retrieved from

https://www.investopedia.com/terms/f/fixedexchangerate.asp#:~:text=A%20fixed%20exchange

%20rate%20is,value%20within%20a%20narrow%20band.

Corporate Finance Institute (n.d.) Options: Calls and Puts. Corporate Finance Institute.

Retrieved from https://corporatefinanceinstitute.com/resources/knowledge/trading-

investing/options-calls-and-puts/